Market volatility and foreign exchange intervention in EMEs: what has changed?

BIS Papers No 73 – October 2013: “Huge swings in capital flows to and from emerging market economies (EMEs) over the past five years have led many countries to re-examine their foreign exchange market intervention strategies. Quite unlike their experiences in the early 2000s, several countries that had at different times resisted appreciation pressures suddenly found themselves having to intervene against strong depreciation pressures. This volume, summarising the discussion and papers presented at the meeting of Deputy Governors of major EMEs in Basel on 21-22 February 2013, addresses three questions. First, what is the role of a flexible exchange rate in stabilising the economy and promoting financial development while preserving stability? Second, how have the motives and strategy behind the interventions changed since the 2008 global financial crisis? Finally, is intervention effective and, if so, how can its efficacy be measured? The general conclusion is that a flexible exchange rate can play a crucial role in smoothing output volatility in EMEs. But a highly volatile exchange rate can increase output volatility and itself become a source of vulnerability. Most official forex interventions in recent years have aimed to stem volatility, rather than to achieve a particular exchange rate. The majority view was that exchange rate intervention needs to be consistent with the monetary policy stance. Persistent, one-sided intervention, associated with a sharp expansion of central bank and commercial bank balance sheets, creates risks for the economy.”

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